Abstract

This paper presents direct evidence concerning the extent, nature, and outcome of interactions between the two primary parties in the auditor-client relationship — finance directors (FDs) and audit engagement partners (AEPs). A questionnaire instrument is used to elicit the frequency with which, over a three year period, an extensive set of 46 audit and audit-related issues is discussed, is negotiated, and results in a change to either the accounting numbers or disclosures. Three hundred FDs and 307 AEPs of listed UK companies are surveyed, with response rates of 51% and 80%, respectively. Principal findings are that: (i) compliance issues dominate discussions, while accounting and fee issues dominate negotiations; (ii) audit committees generally reduce the level of negotiation and increase the level of discussion, suggesting that the overall degree of confrontation declines; and (iii) in the majority of cases (57%), negotiation results in a change to the financial statements, providing evidence of the auditor's influence on the financial statements.